Europe set to open higher after US market turnaround

Even before US markets engineered their turnaround yesterday to finish the day higher, there had been signs that the sharp declines that had spilled over from Friday last week may well have started to run their course, with European markets closing well off their lows of the day, despite still finishing the day lower.

The lack of any haven buying in US treasuries suggested that while investors were a little spooked by the rising tensions in the Middle East, as seen by the sharp rise in the gold price, the inability of both oil prices and gold prices to consolidate their new peaks encouraged investors to start buying back into stocks.

Putting to one side the heat and noise of the events of the last few days, and in the absence of further violence and escalations the reality is that very little has changed. We already know that Iran and the US don’t like each other very much, and this is unlikely to improve any time soon, with the rhetoric likely to remain heightened. As such unless an all-out shooting war breaks out, any likely next steps are unlikely to be anything that isn’t already priced in, with oil prices only modestly higher, and now slipping back again in Asia.

While one can argue that the US miscalculated the strength of reaction to its removal of Soleimani from the battlefield, it can also be argued that Iran pushed its luck once too often in testing the limits of US patience when it came to Iranian interference in various proxy wars, and the targeting of US interests.

As far as today is concerned and the reaction of Asia markets to the US turnaround, we can now expect to see European markets open higher this morning.

In comments made over the weekend ex ECB President Mario Draghi expressed concern that the Euro area was at risk of Japanification when it comes the outlook for inflation and interest rates. He urged EU policymakers to use any fiscal levers at their disposal to help the ailing economy.

His warnings would appear to suggest that he believes the ECB is at the end of the road when it comes to adopting further measures to help the Eurozone economy, particularly since another central bank, which was a trailblazer for negative rates has already thrown in the towel on the practice.

The Swedish Riksbank last month moved its headline rate back to zero prompting criticism in some areas for unnecessarily tightening policy at a time of economic weakness and low inflation. Far from being criticised the Riksbank should be commended for acknowledging that the negative interest rate policy has been a failure, and recognising that the medicine may well have been killing the patient.

Against this back drop it is perhaps welcome that we are starting to see some signs of a recovery in economic activity with yesterday’s services PMI’s showing a decent rebound at the end of last year. Along with the rebound in oil prices which are higher than they were a year ago there are some signs that inflationary pressures are starting to reassert themselves.

Today’s preliminary EU CPI numbers for December are expected to reflect that headline prices expected to edge up from 1% in November to 1.3%. Core prices are expected to be unchanged at 1.3%.

The US economy is also expected to remain in focus after last week’s disappointing ISM manufacturing report, prompted further concerns about a ripple out effect into the rest of the country. This fear seems overstated given how manufacturing and services activity diverged in Europe for nearly all of last year.

Today’s ISM non-manufacturing numbers for December are expected to be as similarly resilient as yesterday’s Markit PMI numbers which came in at 52.8, with expectations of an improvement in the ISM measure to 54.5, which in turn is likely to be an important arbiter for Friday’s US payrolls report.

EURUSD – finding support above the 200-day MA at 1.1130 the bias has shifted towards further gains towards the highs last week at 1.1240. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400. If we fall below 1.1100 then we could drift back towards the 1.1040 area.

GBPUSD – still in the uptrend from the lows in September. The fall from the 1.3500 highs last month found support at the 1.2920 area, and would need a break of this and 50-day MA to signal further declines. A move back above 1.3220 signals a return to the December highs.

EURGBP – the rally from the 0.8275 lows last month is currently finding resistance at the 0.8600 area. For now, we have support between the 0.8450 and 0.8470 area, and while above this level the risk is for further gains towards the December peaks.

USDJPY – currently have some support at the 107.70/80 area, a break of which could see a fall to the 106.80 level. While support just below 108.00 holds the risk is for a return to the 109.20/30 area.

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